Wednesday, July 15, 2009

Picking on the Swiss – the Obama Administration Blows up a Tax Treaty

As the IRS and Justice Department continue to work with USB, the largest bank in Switzerland, to hand over the names of 52,000 U.S. taxpayers with private accounts, some experts are beginning to wonder if this really is a good move by the new administration. Obama just returned from a diplomatic journey around the world, and now as the Federal Government puts pressure on UBS, they might end up ruining our long and peaceful relationship with Switzerland.

According to the Wall Street Journal, “this sort of fishing expedition expressly violates the U.S.-Swiss treaty on sharing tax information. The original treaty dates back 30 years, and under the pact the Swiss regularly provide the IRS with information on specific cases. But what the IRS is attempting here is a mass search of U.S. taxpayers merely for banking in Switzerland.”

This is not to say that everyone caught up in the IRS's dragnet is pure. But the American system of justice contains probable cause and reasonable search requirements precisely to prevent law enforcement from rounding up everyone who might conceivably be guilty of some crime. And while the Justice Department argues that UBS systematically marketed its private banking services in order to avoid U.S. taxation, the charges against UBS itself were settled in February, so this is not about the bank. It is about its customers, and an effort to grab perhaps a couple of billion dollars in allegedly unpaid taxes.

Those customers are protected by Swiss bank-secrecy laws that make it a felony to improperly disclose client identities. Those laws are very much in force, and the Swiss authorities have threatened to seize the client data demanded by the U.S. rather than permit UBS to comply.

Switzerland is a neutral country and so technically isn't an American ally, but it has long been a good friend, representing U.S. interests in Cuba and Iran, among other good offices. On Monday, Judge Alan Gold delayed until August a hearing on the case, giving UBS and the feds time to reach a settlement before the judge rules on the IRS demands. The Justice Department is nonetheless still threatening to indict UBS if it fails to comply.